
a.
The avoidable per unit cost of making the Model K, based on the results whether Company AT should outsource Model K.
a.

Explanation of Solution
Special order decisions: Special order decisions include circumstances in which the board must choose whether to acknowledge abnormal customer orders. These requests or orders normally necessitate special dispensation or include a demand for lesser price.
Avoidable cost: The cost that can be rejected off completely or to some degree by choosing one option over another in a decision making circumstance. In a
Determine the total avoidable costs
The facility-sustaining costs and stock holding costs about 50% remain the equivalent irrespective of whether Model K are obtained or produced. Because these costs do not contrast between the substitutes, and these costs are not avoidable. The
Therefore the total avoidable cost is $1,100,000.
Determine the avoidable cost per unit
Therefore the avoidable cost per unit is $110.
Determine the increase in income
Outsourcing will reduce the cost and increases the income.
Therefore the increase in income is $400,000.
From the results obtained above, the avoidable cost of $110 is greater than the purchase cost of $70. Hence Company AT should outsource Model K. Outsourcing would diminish cost and increments productivity by $400,000.
Therefore Company AT should outsource Model K.
b.
The avoidable per unit cost of produce Model K using new equipment and old equipment and the impact on profitability if Model K are made using new equipment against the old equipment.
b.

Explanation of Solution
Determine the avoidable
Therefore the avoidable cost of using the old equipment is $1,020,000.
Determine the avoidable cost per unit
Therefore the avoidable cost per unit is $102.
Determine the increase in income
Outsourcing will reduce the cost and increases the income.
Therefore the increase in income is $80,000.
From the results obtained above, the avoidable cost of $102 is lesser than the actual purchase cost of $110. Hence the productivity would increments by $80,000.
Therefore Company AT should replace the current equipment.
c.
The impact on profitability between two alternatives.
c.

Explanation of Solution
Determine the difference of cost per unit between two alternatives
Therefore the difference of cost per unit between two alternatives is $32.
Determine the increase in profitability
Therefore the increase in profitability is $160,000.
From the results obtained above, utilizing the new equipment to make Model K is less expensive than utilizing the old equipment and it is even more profitable to outsource Model K. In fact, productivity will be $320,000 higher with outsourcing than it will be if the new equipment is utilized to produce Model K.
Therefore Company AT should outsource Model K.
d.
The qualitative factors Company AT must consider before making a decision to outsource and the ways in which the company minimize the risk of establishing supplier relationship.
d.

Explanation of Solution
The qualitative factors Company AT should consider before making a decision to outsource and the ways in which the company minimizes the risk of establishing supplier relationship is as follows:
Before focusing on the outsourcing decision, Company AT must think about the capacity of the provider or suppliers to deliver the Model K as per the organization's quality principles. Likewise, Company AT must guarantee itself that the Model K will be conveyed on a convenient premise. By outsourcing, Company AT is dropping the advantages of vertical integration.
The organization is reliant on the provider's enactment. The loss of control should be weighed in contradiction of the advantages of cost reduction. Company AT can shield itself from problematic providers by keeping up a rundown of licensed providers. Company AT should furnish these providers with hikes or incentives for providing exceptional services, for example, amount buys and quick invoice payment so as to increase favored customer standing.
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Chapter 6 Solutions
Fundamental Managerial Accounting Concepts
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